If you’re considering a debt consolidation loan, there are a few things you should be aware of before actually getting one. They aren’t small considerations either, as some of them can put an otherwise solid household sideways. Should you already have a hole in your financial ship (or boat), failing to account for these factors can quickly sink it. However, all too often, these aren’t things that less honest debt consolidation services will tell you. Rather, a few of them are more worried about your loan interest than anything else. While they might not sell you a bad loan, they certainly will sell you bad advice.
For starters, if you’re in a position to take on a debt consolidation loan, the very first thing anyone should be discussing with you is your financial management. While you might not want to hear that you’re less than savvy with money, the truth hurts a lot less than losing your home because you really weren’t that good at managing money. This is because many times a person or family can find that they are in a debt trap. Too often the damage caused by bad spending habits is just patched up with a debt consolidation loan. Once free of crushing interest payments, far too many well-intentioned homeowners find themselves falling back into the same bad habits. Before long, they are drowning again, with no lifeboat to rescue them.
For starters, take a debt test. This will help you to see where your finances are. You’ll also better understand what you might be doing that’s contributing to debt. The BBC has a great debt test, and you should take it. The results aren’t really anything you can or should take to the bank (they’re not really financial advice – more like a suggestion), but they give an accurate snapshot of where your finances realistically are. If you get a bad score, then you definitely need some help. However, unless you got a perfect score, you should still consider taking steps to improve your finances – otherwise you might find yourself on the wrong side of the test at a later date.
If your finances are a little off, then the next thing you should do is look into debt consolidation, but to do that, you need to read through the fine print. You will also want to interpret the marketing speak for what it is – utter rubbish. Also be wary of any third party offering to help you out with a government debt consolidation, unless they really are in a position to offer that. Far too often there are companies advertising government debt consolidation as a service, but they aren’t selling anything more than smoke. Where there is smoke, there is fire. Get too close to one of those companies, and you could set your finances on fire.
Here are some translations of the more common marketing doublespeak many companies use:
What they say: Consolidate all of your debts into one monthly payment.
What it means: You’re going to roll all of your debts into one payment, and then quite likely rebuild the same debt bridges all over again with new credit extensions. Get credit counselling before taking this step.
What they say: You can lower your monthly payments to something more affordable.
What it means: In almost every case, you’ll end up spending more, because your loan will be for a longer period of time. Make sure you are getting a lower monthly payment and a lower overall debt balance.
What they say: You can reduce your interest rates with a debt consolidation loan.
What it means: You’ll be paying less interest, which is great, but since the loan will be significantly longer, you’ll still end up paying more interest over time. Make sure you are getting a lower interest rate and a lower payment. Also make sure that the total lifetime interest rate of your loan is clearly explained to you, in terms you understand.
What they say: Your monthly payments will be manageable, because the total payments are less than what you are paying now.
What it means: Honestly, a consolidation loan payment isn’t a get out of debt free card. You still own the debt, and you still owe the money. Many times the total payment will still not be manageable within your financial framework. After all, you got in over your head with debt, and are barely able to make ends meet, or even not at all able to make them meet. Just because a payment is lower isn’t any guarantee that you can still afford it. Get debt counselling, and make sure you are able to afford the payment within a liveable debt framework.
What they say: You can take advantage of a government debt consolidation scheme.
What it means: Utter rubbish. There is no such scheme in existence. While there are debt consolidation tips and advices offered by the government, they do not help you consolidate debt. You have to do the legwork, and you have to find a scheme that works for you.
With that in mind, a debt consolidation can help you, and it is absolutely a viable option for cleaning your debt slate and fixing anything that may be materially wrong with your finances. You’ll still need to start exercising proper debt management to prevent any future financial mishaps.
Remember, with careful planning, and of course debt management and or counselling if necessary, it is possible to right your finances and see clear of crushing debt. You just need to take the right steps to make it work for you and your unique circumstances.